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The Future Is Bright for Cisco Systems, Inc. Stock

Cisco is becoming a software company

By Dana Blankenhorn, InvestorPlace Contributor

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The Future Is Bright for CSCO Stock

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Cisco Systems, Inc. (NASDAQ:CSCO) is up around 11% since it announced earnings in February, bringing its market cap to $218 billion.

That’s almost 4.5 times its 2017 revenue of $48 billion, and 23 times last year’s earnings of $9.6 billion.

Could CSCO stock be trading like a tech stock again? And should it?

For most of the 2010s, Cisco has been trading like an income stock, something you buy for its dividend yield. But the recent price action — Cisco sold at less than $31 per share last July and opened for trade Mar. 15 at about $45 per share — belies that. The CSCO dividend yield, even with a 29-cents-per-share dividend, is now below 3%.

Analysts have done very well with Cisco lately and are hungry for more.  Their target price of $50 per share seems to be in sight.

Will CSCO stock get there?

What’s Up at Cisco?

In part, what is up at Cisco is Trump. A 3% year-over-year gain in revenues doesn’t usually result in an 11% pop on a stock. But Cisco’s board decided to take immediate charges against earnings in anticipation that the impact of the Trump tax cuts would more than make up for it, and that’s a popular stance.

During the October quarter, Cisco paid nearly $600 million in taxes on $2.9 billion in net income. If the tax bill is reduced, net income rises.

On the surface, Cisco remains a steady-as-she-goes stock. Assets have risen in value less than $5 billion, YOY. Cisco has moved some of its debt from long-term to short-term, but its total remains level. Cash flow has barely budged, YOY. I’ve written that the stock will hold its value but won’t make you rich. But could it?

Cisco Is Becoming a Software Company

Below the surface, however, the company does seem to be readying its balance sheet for some major moves. The decision by Lumentum Holdings Inc (NASDAQ:LITE) to buy Oclaro Inc (NASDAQ:OCLR) seems to be whetting analyst appetites for a new wave of consolidation.

If that happens, Cisco, with $17 billion in cash and another $56 billion in short-term securities, should be a buyer. The company is already shopping for deals in India, combining software written at relatively low prices with a global sales force that can get top dollar for it.

Then there is a general optimism about networking, with new 400 GB optical networking gear and 5G wireless approaching the start line. Cisco sees self-driving cars, the Internet of Things and other technologies enabled by 5G quadrupling cloud traffic and delivering $2 trillion in service provider revenues.

Cisco’s corporate blog has been pounding the table for 5G, emphasizing the need for and value of technical collaboration, which is right in Cisco’s wheelhouse.

The most important point about the coming changes is that it increasingly makes Cisco a software company which sells through subscriptions, not a product company dependent on big orders. Its software-defined wide area network (SD-WAN) offerings announced this month are a good example of that.

By embracing the cloud and artificial intelligence, CEO Chuck Robbins has shifted the Cisco story, from one of moving bits around to defining services. It’s in controlling services that vendors find big profits.

Bottom Line for CSCO Stock

When yield stocks become growth stocks, investors are likely to become very loyal, and that is the case with Cisco.

As the move to 5G accelerates and internet companies ramp up their purchasing, the assumption right now is that Cisco will be a big winner. Investors buy a company’s tomorrows not its yesterdays, and the verdict right now is that CSCO stock has some good days ahead.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/the-future-is-bright-for-cisco-stock/.

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